[MFS LOGO](SM) Semiannual Report
INVESTMENT MANAGEMENT January 31, 1997
MFS(R) Government Mortgage Fund
[Graphic image of woman speaking to a man, large window in the background]
<PAGE>
Table of Contents
Letter from the Chairman .............. 1
Portfolio Manager's Overview ........... 2
Portfolio Manager's Profile ........... 3
Performance Summary .................... 4
Fund Facts ............................. 5
Portfolio of Investments ................. 6
Financial Statements .................... 8
Notes to Financial Statements ........... 15
Trustees and Officers .................... 21
[Graphic text]
Highlights
[bullet] For the six months ended January 31, 1997, Class A shares of the Fund
provided a total return at net asset value of 4.60%, while Class B
shares returned 4.21%.
[bullet] The Fund's interest rate sensitivity is slightly less than that of a
five-year U.S. Treasury bond and approximately 80% of the Fund is
invested in government-agency mortgage-backed securities, with the
remainder invested in other agency securities as well as U.S.
Treasuries.
[bullet] The yield advantage of mortgages over Treasuries has narrowed, with
current-coupon GNMAs yielding only about 1 percentage point more than
10-year Treasuries, whereas in early October they yielded as much as
1.2 percentage points more.
<PAGE>
[Photo of A. Keith Brodkin]
Letter from the Chairman
Dear Shareholders:
After more than six years of expansion, the U.S.
economy appears headed toward another year of at
least moderate growth in 1997, although a few signs
point to the possibility of a modest rise in
inflation during the year. On the positive side, the
pattern of moderate growth and inflation set over the
past few years now seems fairly well entrenched in
the economy and, short of a major international or
domestic crisis, appears to have enough momentum to
remain on track for some time. Also, recent gains in
such important sectors as housing, automobiles,
industrial production, and exports indicate a fair
amount of underlying strength in the economy.
However, some reason for caution can be seen in the
continuing high level of consumer debt and the
attendant rise in personal bankruptcies, as well as
in the modestly disappointing level of holiday sales.
Also, the ongoing tightness in labor markets, and
price rises in such important sectors as energy,
could add some inflationary pressures to the economy.
Given these somewhat conflicting indicators, we
expect real (inflation-adjusted) growth to revolve
around 2% in 1997, which would represent a modest
decline from 1996.
In the bond markets, conflicting signals over the strength of the economy have
created near-term volatility, while comments by Federal Reserve Chairman Alan
Greenspan late in 1996 and in February of this year created some uncertainty
over the Federal Reserve Board's next move. However, we expect the Fed to
maintain its anti-inflationary stance should signs of more rapid economic growth
and, particularly, of higher inflation resurface. While inflationary forces
largely remained in check in 1996, the continued strength in the labor market
and rising energy prices mean that a pickup in inflation is still possible. At
the same time, the U.S. budget deficit continues to decline and, as a percentage
of gross domestic product, is now less than 2%, which we consider a positive
development for the bond markets. Although interest rates may move higher over
the coming months, we believe that, at current levels, fixed-
income markets remain equitably valued.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
February 14, 1997
1
<PAGE>
Portfolio Manager's Overview
[Photo of James J. Calmas]
Dear Shareholders:
Over the last six months, the U.S. fixed-income
markets have been buffeted by various factors. The
presidential election, economic growth, hints of an
upsurge in inflation, and foreign purchases of U.S.
bonds have all caused interest rate movements to
accelerate. During this period, the yield on 30-year
U.S. Treasury securities was as high as 7.15% in
early September and as low as 6.35% at the end of
James J. Calmas November.
Even though the bond markets have experienced gyrations, the under
lying economic situation has been relatively steady. Inflation continues to be
around 3%, the unemployment rate has remained at a consistently low level of
approximately 5%, and the economy grew at a modest 2.6% rate in 1996. We believe
this economic environment appears to be sustainable, reducing the need for
action by the Federal Reserve Board. Consequently, we foresee no major changes
in interest rates. Under these conditions, we have felt it prudent not to alter
dramatically the portfolio's composition or risk profile. In this environment,
Class A shares of the Fund provided a total return of 4.60% during the six
months ended January 31, 1997, while Class B shares returned 4.21%. These
returns, which include the reinvestment of distributions but exclude the effects
of any sales charges, compare to a 5.53% return for the Lehman Brothers
Government National Mortgage Association (GNMA) Index, an unmanaged index of
GNMA issues with more than $50 million outstanding.
Currently, the Fund has an interest rate sensitivity slightly less than that of
a five-year U.S. Treasury bond. Approximately 80% of the Fund is invested in
government-agency mortgage-backed securities, with the remainder invested in
other agency securities and U.S. Treasuries.
We are closely watching the mortgage market because the yield advantage of
mortgages over Treasuries has narrowed, with current-coupon GNMAs now yielding
only approximately 100 basis points (1.0%) more than 10-year Treasuries after
yielding as much as 120 basis points (1.2%) more in early October. (Principal
value and interest on Treasury securities are guaranteed by the U.S. government
if held to maturity.) As a result of this compression of yields and the added
yield of mortgages, both the Fund and the GNMA Index outperformed Treasuries
over the last six months. The narrowing of yields has occurred because, without
any clear direction in rates, bond market participants have been willing to take
less of a premium to hold non-Treasury securities. We will be watching closely
to see
2
<PAGE>
Portfolio Manager's Overview - continued
if this phenomenon begins to reverse itself; if the yield differential gets much
tighter and we do not think the Fund's potential returns are commensurate with
the prepayment risk of certain mortgage-backed securities, we will seek to
reduce the portfolio's exposure to mortgages.
Respectfully,
/s/ James J. Calmas
James J. Calmas
Portfolio Manager
[Graphic text]
Portfolio Manager's Profile
James J. Calmas joined the MFS Fixed Income Department in 1988. A graduate of
Dartmouth College and the Amos Tuck School of Business Administration of
Dartmouth College, he was named Assistant Vice President--Investments in 1991.
In 1993, he was named Vice President--Investments and Portfolio Manager of MFS
Government Mortgage Fund.
3
<PAGE>
Performance Summary
Because mutual funds like MFS Government Mortgage Fund are designed for
investors with long-term goals, we have provided cumulative results as well as
the average annual total returns for Class A and Class B shares for the
applicable time periods.
Average Annual and Cumulative Total Rates of Return
Class A Investment Results for Periods Ended January 31, 1997
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Cumulative Total Return +4.60% +3.18% +37.33% +84.05%
- --------------------------------------------------------------------------------
Average Annual Total Return -- +3.18% + 6.55% + 6.29%
- --------------------------------------------------------------------------------
SEC Results -- -1.71% + 5.52% + 5.77%
- --------------------------------------------------------------------------------
Class B Investment Results for Periods Ended January 31, 1997
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Cumulative Total Return +4.21% +2.40% +34.01% +79.59%
- --------------------------------------------------------------------------------
Average Annual Total Return -- +2.40% + 6.03% + 6.03%
- --------------------------------------------------------------------------------
SEC Results -- -1.47% + 5.73% + 6.03%
- --------------------------------------------------------------------------------
All results represent past performance and are not an indication of future
results. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost.
Class A SEC results include the maximum 4.75% sales charge. Class B SEC results
reflect the applicable contingent deferred sales charge (CDSC), which declines
over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class B shares have
higher annual fees and expenses than Class A shares.
Class B share performance includes the performance of the Fund's Class A shares
for periods prior to the commencement of offering of Class B shares on September
7, 1993. Sales charges and operating expenses for Class A and Class B shares
differ. The Class A share performance, which is included within the Class B
share SEC performance, has been adjusted to reflect the CDSC generally
applicable to Class B shares rather than the initial sales charge generally
applicable to Class A shares. Class B share performance has not been adjusted,
however, to reflect differences in operating expenses (e.g., Rule 12b-1 fees),
which generally are lower for Class A shares.
Fund results reflect any applicable expense subsidies and waivers, without which
the performance results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details.
4
<PAGE>
[Graphic text]
Fund Facts
Strategy: The Fund's primary investment objective is to provide
a high level of current income.
Commencement of
investment operations: January 9, 1986
Size: $1.0 billion net assets as of January 31, 1997
Portfolio Concentration as of January 31, 1997
Portfolio Structure
[Graphic pie chart]
Mortgage Backed 78%
Other Government Agencies 16%
U.S. Treasuries 4%
Cash 2%
5
<PAGE>
Portfolio of Investments (Unaudited) - January 31, 1997
Bonds - 98.0%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation - 4.9%
FHLMC, 8.5s, 2009 - 2017 $ 47 $ 49,401
FHLMC, 9s, 2001 - 2025 46,695 49,043,021
FHLMC, 9.5s, 2013 - 2021 305 330,022
------------
$49,422,444
- -------------------------------------------------------------------------------
Federal Housing Authority - 2.5%
FHA Centennial, "A", 8.25s, 2028+ $23,680 $24,953,513
- -------------------------------------------------------------------------------
Federal National Mortgage Association - 4.8%
FNMA, 6.695s, 2005 $10,000 $10,312,500
FNMA, 7s, 2026 - 2027 12,033 11,777,520
FNMA, 7.5s, 2022 42 41,858
FNMA, 7.95s, 2005 6,290 6,490,494
FNMA, 8s, 2017 - 2023 1,302 1,327,998
FNMA, 8.5s, 2004 - 2008 344 359,161
FNMA, 9s, 2002 - 2017 17,237 18,023,602
------------
$48,333,133
- -------------------------------------------------------------------------------
Financing Corporation - 6.7%
FICO, 9.8s, 2018 $ 5,285 $ 6,793,709
FICO, 10.35s, 2018 33,965 45,762,403
FICO, 10.7s, 2017 11,305 15,586,769
------------
$68,142,881
- -------------------------------------------------------------------------------
Small Business Administration - 5.5%
SBA, 8.05s, 2012 $ 2,492 $ 2,546,604
SBA, 8.75s, 2006 146 154,106
SBA, 8.8s, 2011 3,002 3,242,067
SBA, 8.85s, 2011 11,896 12,869,360
SBA, 9.3s, 2010 3,524 3,853,959
SBA, 9.45s, 2010 8,623 9,465,378
SBA, 9.55s, 2010 8,912 9,799,264
SBA, 9.7s, 2010 2,724 3,005,447
SBA, 10s, 2009 3,258 3,620,170
SBA, 10.1s, 2009 - 2009 6,566 7,290,730
------------
$55,847,085
- -------------------------------------------------------------------------------
U.S. Federal Agencies - 0.6%
Agency for Israel, 5.89s, 2005 $ 3,000 $ 2,831,250
Federal Agricultural Mortgage Corp., 8.07s,
2006 3,000 3,257,340
------------
$ 6,088,590
- -------------------------------------------------------------------------------
U.S. Government Guaranteed - 73.0%
Government National Mortgage Association - 68.7%
GNMA, 6.5s, 2023 - 2026 $38,374 $36,575,258
GNMA, 7s, 2022 - 2025 166,977 163,481,594
GNMA, 7.5s, 2008 - 2026 178,764 179,408,947
GNMA, 8s, 2002 - 2026 160,443 164,065,218
GNMA, 8.5s, 2022 - 2023 11,113 11,550,638
GNMA, 9s, 2008 - 2022 76,637 80,713,578
GNMA, 9.5s, 2009 - 2019 13,460 14,360,555
GNMA, 10s, 2009 - 2019 21,063 23,149,794
GNMA, 11s, 2021 19,020 21,617,674
6
<PAGE>
Portfolio of Investments (Unaudited) - continued
Bonds - continued
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
U.S. Government Guaranteed - continued
Government National Mortgage Association - continued
GNMA, 12.5s, 2011 $ 466 $ 547,065
-------------
$ 695,470,321
- -------------------------------------------------------------------------------
U.S. Treasury Obligations - 4.3%
U.S. Treasury Bonds, 13.125s, 2001### $22,550 $ 28,282,661
U.S. Treasury Bonds, 10.375s, 2012 11,800 15,070,842
-------------
$ 43,353,503
- -------------------------------------------------------------------------------
Total U.S. Government Guaranteed $ 738,823,824
- -------------------------------------------------------------------------------
Total Bonds (Identified Cost, $991,285,990) $ 991,611,470
- -------------------------------------------------------------------------------
Repurchase Agreement - 1.2%
- -------------------------------------------------------------------------------
Investments in repurchase agreements with Goldman
Sachs, in a joint trading account ($11,699,000 par),
dated 1/31/97, due 2/03/97, total to be received by
the Fund $11,704,411 collateralized by various U.S.
Treasury obligations (with $346,311,000 par and
valued at $346,471,169), at cost $11,699 $ 11,699,000
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,002,984,990) $1,003,310,470
Other Assets, Less Liabilities - 0.8% 8,151,411
- -------------------------------------------------------------------------------
Net Assets - 100.0% $1,011,461,881
- -------------------------------------------------------------------------------
+Restricted security.
###Security segregated as collateral for an open futures contract.
See notes to financial statements
7
<PAGE>
Financial Statements
Statement of Assets and Liabilities (Unaudited)
- -------------------------------------------------------------------------------
January 31, 1997
- -------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $1,002,984,990) $1,003,310,470
Cash 176,218
Receivable for Fund shares sold 162,323
Interest receivable 10,385,891
Other assets 13,899
--------------
Total assets $1,014,048,801
--------------
Liabilities:
Payable for Fund shares reacquired $ 1,502,358
Payable for daily variation margin on open futures
contracts 437,500
Payable to affiliates -
Management fee 12,511
Shareholder servicing agent fee 3,614
Distribution fee 7,921
Accrued expenses and other liabilities 623,016
--------------
Total liabilities $ 2,586,920
--------------
Net assets $1,011,461,881
--------------
Net assets consist of:
Paid-in capital $1,138,593,229
Unrealized appreciation on investments 859,449
Accumulated net realized loss on investments (128,922,356
Accumulated undistributed net investment income 931,559
--------------
Total $1,011,461,881
--------------
Shares of beneficial interest outstanding 153,101,086
------------
Class A shares:
Net asset value per share
(net assets of $686,053,567 [divided by] 103,837,782 shares of
beneficial interest outstanding) $6.61
-----
Offering price per share (100 [divided by] 95.25) $6.94
-----
Class B shares:
Net asset value and offering price per share
(net assets of $325,249,334 [divided by] 49,239,253 shares of
beneficial interest outstanding) $6.61
-----
Class I shares:
Net asset value, offering price and redemption price per share
(net assets of $158,980 [divided by] 24,051 shares of beneficial
interest outstanding) $6.61
-----
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A
and Class B shares.
See notes to financial statements
8
<PAGE>
Financial Statements - continued
Statement of Operations (Unaudited)
- -------------------------------------------------------------------------------
Six Months Ended January 31, 1997
- -------------------------------------------------------------------------------
Net investment income:
Interest income $41,442,952
-----------
Expenses -
Management fee $ 2,402,296
Trustees' compensation 35,530
Shareholder servicing agent fee (Class A) 331,398
Shareholder servicing agent fee (Class B) 486,155
Shareholder servicing agent fee 112,534
Distribution and service fee (Class A) 954,915
Distribution and service fee (Class B) 2,609,986
Custodian fee 197,921
Postage 91,312
Printing 64,922
Auditing fees 20,525
Legal fees 2,894
Miscellaneous 317,548
-----------
Total expenses $ 7,627,936
Fees paid indirectly (176,268)
-----------
Net expenses $ 7,451,668
-----------
Net investment income $33,991,284
-----------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) -
Investment transactions $(2,608,922)
Futures contracts (5,252,027)
-----------
Net realized loss on investments $(7,860,949)
-----------
Change in unrealized appreciation -
Investments $17,792,253
Futures contracts 1,842,602
-----------
Net unrealized gain on investments $19,634,855
-----------
Net realized and unrealized gain on investments $11,773,906
-----------
Increase in net assets from operations $45,765,190
-----------
See notes to financial statements
9
<PAGE>
Financial Statements - continued
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
Six Months Ended
January 31, 1997 Year Ended
(Unaudited) July 31, 1996
- -------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 33,991,284 $ 78,380,863
Net realized loss on investments (7,860,949) (2,426,844)
Net unrealized gain (loss) on investments 19,634,855 (20,890,441)
------------- -------------
Increase in net assets from operations $ 45,765,190 $ 55,063,578
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (17,489,165) $ (35,352,327)
From net investment income (Class B) (15,427,081) (37,804,675)
From net investment income (Class I) (930) --
Tax return of capital -- (2,132,709)
------------- -------------
Total distributions declared to
shareholders $ (32,917,176) $ (75,289,711)
------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 272,277,757 $ 225,940,176
Net asset value of shares issued to
shareholders in reinvestment of
distributions 15,520,874 34,824,383
Cost of shares reacquired (383,153,686) (492,622,301)
------------- -------------
Decrease in net assets from Fund share
transactions $ (95,355,055) $(231,857,742)
------------- -------------
Total decrease in net assets $ (82,507,041) $(252,083,875)
Net assets:
At beginning of period 1,093,968,922 1,346,052,797
------------- -------------
At end of period (including accumulated
undistributed (distributions in excess of)
net investment income of $931,559 and
$(142,549), respectively) $1,011,461,881 $1,093,968,922
------------- -------------
See notes to financial statements
10
<PAGE>
Financial Statements - continued
Financial Highlights
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Eight
Six Months July 31, Months Year Ended
Ended -------------------- Ended November 30,
January 31, July 31, --------------------
1997 1996 1995 1994 1993 1992
(Unaudited) --------- --------- -------------- --------- ----------
--------------
Class A
--------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 6.53 $ 6.65 $ 6.49 $ 6.85 $ 6.82 $ 6.95
-------- ------ ------ --------- ------ ------
Income from investment operations# -
Net investment income[sec] $ 0.19 $ 0.45 $ 0.45 $ 0.29 $ 0.34 $ 0.46
Net realized and unrealized gain
(loss) on investments 0.11 (0.14) 0.14 (0.36) 0.20 0.09
-------- ------ ------ --------- ------ ------
Total from investment
operations $ 0.30 $ 0.31 $ 0.59 $ (0.07) $ 0.54 $ 0.55
-------- ------ ------ --------- ------ ------
Less distributions declared to
shareholders -
From net investment income $ (0.22) $(0.42) $(0.42) $ (0.20) $(0.47) $(0.42)
In excess of net realized gain on
investments -- -- -- -- (0.04) --
From paid-in capital -- -- -- (0.09) -- (0.26)
Tax return of capital -- (0.01) (0.01) -- -- --
-------- ------ ------ --------- ------ ------
Total distributions declared to
shareholders $ (0.22) $(0.43) $(0.43) $ (0.29) $(0.51) $(0.68)
-------- ------ ------ --------- ------ ------
Net asset value - end of period $ 6.61 $ 6.53 $ 6.65 $ 6.49 $ 6.85 $ 6.82
-------- ------ ------ --------- ------ ------
Total return[dbldag] 4.60%++ 4.76% 9.60% (1.51)%+ 8.11% 8.25%
Ratios (to average net assets)/
Supplemental data[sec]:
Expenses## 1.05%+ 1.16% 1.25% 1.27%+ 1.38% 1.42%
Net investment income 6.74%+ 6.75% 6.99% 6.46%+ 6.30% 6.57%
Portfolio turnover 14% 25% 87% 37% 167% 484%
Net assets at end of period
(000,000 omitted) $ 686 $ 541 $ 534 $ 424 $ 522 $ 715
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to November 30, 1993 is based on average shares
outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for fees paid indirectly.
[dbldag]Total returns for Class A shares do not include the applicable sales charge (except for
reinvested dividends prior to October 1, 1989). If the charge had been included, the results
would have been lower.
[sec]The investment adviser voluntarily waived a portion of its management fee for certain of the
periods indicated. If this fee had been incurred by the Fund, the net investment income per
share and the ratios would have been:
Net investment income $ -- $ -- $ -- $ 0.29 $ 0.34 $ --
Ratios (to average net assets):
Expenses -- -- -- 1.28%+ 1.46% --
Net investment income -- -- -- 6.45%+ 6.22% --
</TABLE>
11
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended November 30, 1991 1990 1989 1988 1987 1986*
- ----------------------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 7.01 $ 7.86 $ 7.82 $ 8.34 $ 9.82 $ 9.53
------ ------ ------ ------ --------- ---------
Income from investment operations -
Net investment income $ 0.48 $ 0.53 $ 0.59 $ 0.64 $ 0.75 $ 0.72
Net realized and unrealized gain
(loss) on investments 0.25 (0.40) 0.48 (0.06) (1.08) 0.43
------ ------ ------ ------ --------- ---------
Total from investment
operations $ 0.73 $ 0.13 $ 1.07 $ 0.58 $ (0.33) $ 1.15
------ ------ ------ ------ --------- ---------
Less distributions declared to
shareholders -
From net investment income $(0.44) $(0.49) $(0.58) $(0.64) $ (0.82) $ (0.65)
In excess of net realized gain on
investments -- -- -- -- (0.01) (0.21)
From paid-in capital (0.35) (0.49) (0.45) (0.46) (0.32) --
------ ------ ------ ------ --------- ---------
Total distributions declared to
shareholders $(0.79) $(0.98) $(1.03) $(1.10) $ (1.15) $ (0.86)
------ ------ ------ ------ --------- ---------
Net asset value - end of period $ 6.95 $ 7.01 $ 7.86 $ 7.82 $ 8.34 $ 9.82
------ ------ ------ ------ --------- ---------
Total return++ 11.00% 2.05% 14.72% 7.39% (3.37)% 13.75%+
Ratios (to average net assets)/
Supplemental data:
Expenses 1.44% 1.40% 1.37% 1.38% 1.34% 1.00%+
Net investment income 6.91% 7.29% 7.57% 7.88% 8.34% 9.54%+
Portfolio turnover 731% 507% 489% 285% 212% 169%
Net assets at end of period
(000,000 omitted) $ 886 $1,068 $1,380 $1,295 $ 1,129 $ 593
*For the period from the commencement of investment operations, January 9, 1986 to November 30, 1986.
+Annualized.
++Total returns for Class A shares do not include the applicable sales charge (except for reinvested
dividends prior to October 1, 1989). If the charge had been included, the results would have
been lower.
</TABLE>
See notes to financial statements
12
<PAGE>
Financial Statements - continued
Financial Highlights
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Eight
Six Months Year Ended Months Period
Ended July 31, Ended Ended
January 31, --------------------- July 31, November 30,
1997 1996 1995 1994 1993**
(Unaudited) --------- --------- -------------- --------------
--------------
Class B
--------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 6.53 $ 6.65 $ 6.49 $ 6.84 $ 6.97
-------- ------ ------ --------- ---------
Income from investment operations# -
Net investment income[sec] $ 0.20 $ 0.40 $ 0.41 $ 0.26 $ 0.38
Net realized and unrealized gain
(loss) on investments 0.07 (0.13) 0.14 (0.35) (0.44)
-------- ------ ------ --------- ---------
Total from investment
operations $ 0.27 $ 0.27 $ 0.55 $ (0.09) $ (0.06)
-------- ------ ------ --------- ---------
Less distributions declared to
shareholders -
From net investment income $ (0.19) $(0.38) $(0.38) $ (0.18) $ (0.07)
From paid-in capital -- -- -- (0.08) --
Tax return of capital -- (0.01) (0.01) -- --
-------- ------ ------ --------- ---------
Total distribution declared to
shareholders $ (0.19) $(0.39) $(0.39) $ (0.26) $ (0.07)
-------- ------ ------ --------- ---------
Net asset value - end of period $ 6.61 $ 6.53 $ 6.65 $ 6.49 $ 6.84
-------- ------ ------ --------- ---------
Total return 4.21%++ 3.98% 8.81% (1.97)%+ (3.91)%+
Ratios (to average net assets)/
Supplemental data[sec]:
Expenses## 1.75%+ 1.87% 1.96% 1.94%+ 1.87%+
Net investment income 5.98%+ 6.01% 6.28% 5.80%+ 5.92%+
Portfolio turnover 14% 25% 87% 37% 167%
Net assets at end of period
(000,000 omitted) $ 325 $ 553 $ 812 $ 1,229 $ 1,628
**For the period from the commencement of offering of Class B shares, September 7, 1993 to
November 30, 1993.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to November 30, 1993 is based on average shares
outstanding.
##For the fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for fees paid indirectly.
[sec]The investment adviser voluntarily waived a portion of its management fee for certain of the
periods indicated. If this fee had been incurred by the Fund, the net investment income per
share and the ratios would have been:
Net investment income $ -- $ -- $ -- $ 0.26 $ 0.38
Ratios (to average net assets):
Expenses -- -- -- 1.94%+ 1.94%+
Net investment income -- -- -- 5.80%+ 5.85%+
</TABLE>
See notes to financial statements
13
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- ------------------------------------------------------------------------------
Period Ended January 31, 1997**** (Unaudited)
- ------------------------------------------------------------------------------
Class I
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 6.59
--------
Income from investment operations# -
Net investment income $ 0.04
Net realized and unrealized gain on investments 0.02
--------
Total from investment operations $ 0.06
--------
Less distributions declared to shareholders
from net investment income $ (0.04)
--------
Net asset value - end of period $ 6.61
--------
Total return 0.90%++
Ratios (to average net assets)/Supplemental data:
Expenses 0.71%++
Net investment income 7.15%+
Portfolio turnover 14%+
Net assets at end of period (000 omitted) $ 159
****For the period from the commencement of offering of Class I shares,
January 1, 1997 to January 31, 1997.
+Annualized.
++Not annualized.
#Per share data is based on average shares outstanding.
See notes to financial statements
14
<PAGE>
Notes to Financial Statements (Unaudited)
(1) Business and Organization
MFS Government Mortgage Fund (the Fund) is a diversified series of MFS Series
Trust X (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement. The
Fund, along with other affiliated entities of Massachusetts Financial Services
Company (MFS), may utilize a joint trading account for the purpose of entering
into one or more repurchase agreements.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities, currency or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Fund is required
to deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Fund
each day, depending on the daily fluctuations in the value of the underlying
15
<PAGE>
Notes to Financial Statements (Unaudited) - continued
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Fund. The Fund's investment in futures contracts is designed to
hedge against anticipated future changes in interest or exchange rates or
securities prices. Investments in interest rate futures for purposes other than
hedging may be made to modify the duration of the portfolio without incurring
the additional transaction costs involved in buying and selling the underlying
securities. Investments in currency futures for purposes other than hedging may
be made to change the Fund's relative position in one or more currencies without
buying and selling portfolio assets. Should interest rates or securities prices
move unexpectedly, the Fund may not achieve the anticipated benefits of the
futures contracts and may realize a loss.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Interest
payments received in additional securities are recorded on the ex-interest date
in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Distributions to shareholders are recorded on the
ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
16
<PAGE>
Notes to Financial Statements (Unaudited) - continued
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains.
At July 31, 1996, the Fund, for federal income tax purposes, had a capital loss
carryforward of ($122,165,401) which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on July 31, 1998 ($81,836,532), July 31, 2002 ($5,628,534), July 31,
2003 ($4,604,728), and July 31, 2004 ($30,095,607).
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, and Class I shares. The three classes of shares differ in their
respective distribution and service fees. All shareholders bear the common
expenses of the Fund pro rata based on the average daily net assets of each
class, without distinction between share classes. Dividends are declared
separately for each class. No class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with MFS to
provide overall investment advisory and administrative services, and general
office facilities. The management fee is computed daily and paid monthly at an
effective annual rate of 0.45% of average daily net assets.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and MFS
Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan for
all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $14,405 for the period ended
January 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$12,625 for the period ended January 31, 1997, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans for Class A and Class B
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD up to 0.35% per
annum of its average daily net assets attributable to Class A shares in order
that MFD may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with MFD of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to MFD of up to 0.10%
17
<PAGE>
Notes to Financial Statements (Unaudited) - continued
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers and payments to MFD wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. MFD retains the service fee for accounts not attributable
to a securities dealer which amounted to $130,176 for the period ended January
31, 1997. Fees incurred under the distribution plan during the period ended
January 31, 1997 were 0.35% of average daily net assets attributable to Class A
shares on an annualized basis.
The Fund's distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B shares. MFD will pay to
securities dealers that enter into a sales agreement with MFD all or a portion
of the service fee attributable to Class B shares. The service fee is intended
to be additional consideration for services rendered by the dealer with respect
to Class B shares. MFD retains the service fee for accounts not attributable to
a securities dealer, which amounted to $118,843 for Class B shares, for the
period ended January 31, 1997. Fees incurred under the distribution plan during
the period ended January 31, 1997 were 1.00% of average daily net assets
attributable to Class B shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases by retirement
plans are subject to a contingent deferred sales charge in the event of a
shareholder redemption within 12 months following such purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class B shares in
the event of a shareholder redemption within six years of purchase. MFD receives
all contingent deferred sales charges. Contingent deferred sales charges imposed
during the period ended January 31, 1997 were $127 and $187,241 for Class A and
Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the Fund's average daily net assets at an effective annual rate of
0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of the
average daily net assets of each class of shares at an effective annual rate of
up to 0.15% and up to 0.22% attributable to Class A and Class B shares,
respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
------------ ------------
U.S. government securities $126,079,311 $215,056,039
------------ ------------
18
<PAGE>
Notes to Financial Statements (Unaudited) - continued
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $1,002,984,990
--------------
Gross unrealized appreciation $ 18,575,411
Gross unrealized depreciation (18,249,931)
--------------
Net unrealized appreciation $ 325,480
--------------
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
<TABLE>
<CAPTION>
Period Ended January 31, 1997 Year Ended July 31, 1996
------------------------------ ---------------------------------
Shares Amount Shares Amount
------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 29,784,855 $ 195,767,749 17,258,809 $ 115,389,414
Shares issued to
shareholders in
reinvestment of
distributions 1,175,153 7,707,677 2,410,533 16,042,351
Shares reacquired (9,962,203) (65,589,464) (17,105,744) (113,835,287)
----------- ------------- ------------ -------------
Net increase 20,997,805 $ 137,885,962 2,563,598 $ 17,596,478
----------- ------------- ------------ -------------
</TABLE>
Class B Shares
<TABLE>
<CAPTION>
Period Ended January 31, 1997 Year Ended July 31, 1996
---------------------------------- ---------------------------------
Shares Amount Shares Amount
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 11,606,766 $ 76,344,369 16,626,636 $ 110,550,762
Shares issued to
shareholders in
reinvestment of
distributions 1,190,914 7,812,267 2,820,005 18,782,032
Shares reacquired (48,310,208) (317,556,142) (56,843,019) (378,787,014)
------------ -------------- ------------ --------------
Net decrease (35,512,528) $ (233,399,506) (37,396,378) $ (249,454,220)
------------ -------------- ------------ --------------
</TABLE>
Class I Shares
Period Ended January 31, 1997*
-----------------------------
Shares Amount
--------- -----------
Shares sold 25,135 $ 165,639
Shares issued to
shareholders in
reinvestment of
distributions 142 930
Shares reacquired (1,226) (8,080)
------- ---------
Net increase 24,051 $ 158,489
------- ---------
*For the period from commencement of offering of Class I Shares, January 1,
1997 to January 31, 1997.
19
<PAGE>
Notes to Financial Statements (Unaudited) - continued
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $400 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the period ended January
31, 1997 was $5,265.
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates. These financial instruments include futures contracts.
The notional or contractual amounts of these instruments represent the
investment the Fund has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
Futures Contracts
Unrealized
Appreciation
Expiration Contracts Position (Depreciation)
- --------------------------------------------------------------------------------
U.S. Treasury Bonds March 1997 400 Short $ 622,351
U.S. Treasury Bonds March 1997 100 Short (88,382)
---------
$ 533,969
---------
At January 31, 1997, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
(8) Restricted Securities
The Fund may invest not more than 10% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At January 31, 1997,
the Fund owned the following restricted security (constituting 2.5% of total
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such security be
registered. The value of this security is determined by valuations supplied by a
pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees.
Date of Principal Amount
Description Acquisition (000 Omitted) Cost Value
- -------------------------------------------------------------------------------
FHA, Centennial, "A",
8.25s, 2028 3/23/93 $23,680 $24,390,171 $24,953,513
----------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
20
<PAGE>
MFS(R) Government Mortgage Fund
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor; Former Chairman and Director (until
1991), Massachusetts Financial Services Company; Director, Cambridge Bancorp;
Director, Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer, Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director, Massachusetts Financial Services
Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management Corp. (investment advisers)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Portfolio Manager
James J. Calmas*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
*Affiliated with the Investment Adviser
Investor Information
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458 anytime
from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m.
to 5 p.m. Eastern time (or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any business day from
8 a.m to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576 any
business day from 9 a.m. to 5 p.m. Eastern time. To use this service, your
phone must be equipped with a Telecommunications Device for the Deaf.
For share prices, account balances, and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255) anytime from a touch-tone telephone.
World Wide Web
www.mfs.com
*************[dalbar boxed graphic]*************
[logo--DALBAR
MFS #1
TOP-RATED SERVICE]
For the third year in a row, MFS earned a #1 ranking in the DALBAR, Inc.
Broker/Dealer Survey, Main Office Operations Service Quality Category. The
firm achieved a 3.48 overall score on a scale of 1 to 4 in the 1996 survey. A
total of 110 firms responded, offering input on the quality of service they
received from 29 mutual fund companies nationwide. The survey contained
questions about service quality in 15 categories, including "knowledge of
phone service contacts," "accuracy of transaction processing," and "overall
ease of doing business with the firm."
21
<PAGE>
[back cover]
MFS(R) Government
Mortgage
Fund
500 Boylston Street
Boston, MA 02116-3741
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MFS(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
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MFS #1
TOP-RATED SERVICE
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(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MGM-3-3/97/105M 16/216
